UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended
June 30, 2004OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
57-0866076
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
34 Broad Street, Charleston, South Carolina
29401
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(843) 529-5933
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X NOAPPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding Shares at
Common Stock
July 30, 2004
$.01 Par Value
12,369,935
FIRST FINANCIAL HOLDINGS, INC.
INDEX
PART I -- CONSOLIDATED FINANCIAL INFORMATION
PAGE NO.
Item
1.
Consolidated Financial Statements
Consolidated Statements of Financial Condition
1
at June 30, 2004 and September 30, 2003
Consolidated Statements of Income for the Three
Months Ended June 30, 2004 and 2003
2
Consolidated Statements of Income for the Nine
Months Ended June 30, 2004 and 2003
3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income at June 30, 2004 and 2003
4
Consolidated Statements of Cash Flows for the
Nine months Ended June 30, 2004 and 2003
5
Notes to Consolidated Financial Statements
6-16
2.
Management's Discussion and Analysis of Financial
17-37
Condition and Results of Operations
3.
Quantitative and Qualitative Disclosures About Market Risk
37
4.
Controls and Procedures
38
PART II -- OTHER INFORMATION
Item
1.
Legal Proceedings
39
2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
40
6.
Exhibits and Report on Form 8-K
41-42
SIGNATURES
43
EXHIBIT 31 -- CERTIFICATIONS
44-45
EXHIBIT 32 -- CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
46
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the Financial Statements and related notes.
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, September 30, 2004 2003 (Amounts in thousands) (Unaudited) ASSETS Cash and cash equivalents $ 94,386 $ 85,523 Investments available for sale, at fair value 30,951 13,787 Investment in capital stock of FHLB, at cost 37,600 29,900 Loans receivable, net of allowance of $14,780 and $14,957 1,805,170 1,781,881 Loans held for sale 7,292 20,051 Mortgage-backed securities available for sale, at fair value 361,409 303,470 Accrued interest receivable 9,045 8,823 Office properties and equipment, net 51,704 37,199 Real estate and other assets acquired in settlement of loans 4,325 4,009 Intangible assets 22,621 16,351 Other assets 27,369 21,888 Total assets $ 2,451,872 $ 2,322,882 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,468,169 $ 1,481,651 Advances from Federal Home Loan Bank 722,000 598,000 Other short-term borrowings 1,103 24,075 Long-term debt 46,392 Advances by borrowers for taxes and insurance 5,333 5,904 Outstanding checks 17,525 21,719 Accounts payable and other liabilities 28,125 28,527 Total liabilities 2,288,647 2,159,876 Stockholders' equity: Serial preferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued 16,051,576 and 15,870,130 shares at June 30, 2004 and September 30, 2003, respectively 161 159 Additional paid-in capital 43,775 41,106 Retained income, substantially restricted 186,183 176,111 Accumulated other comprehensive (loss) income, net of income taxes (2,383 )
672 Treasury stock at cost, 3,669,168 and 3,348,029 shares at June 30, 2004 and September 30, 2003, respectively (64,511 )
(55,042 )
Total stockholders' equity 163,225 163,006 Total liabilities and stockholders' equity $ 2,451,872 $ 2,322,882 The accompanying notes are an integral part of the consolidated financial statements. 1
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, 2004 2003 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest and fees on loans $ 27,386 $ 30,583 Interest on mortgage-backed securities 3,704 2,046 Interest and dividends on investments 436 344 Other 19 25 Total interest income 31,545 32,998 INTEREST EXPENSE Interest on deposits 5,344 6,595 Interest on borrowed money 7,048 6,836 Total interest expense 12,392 13,431 NET INTEREST INCOME 19,153 19,567 Provision for loan losses 1,125 1,450 Net interest income after provision for loan losses 18,028 18,117 OTHER INCOME Net gain on sale of loans 390 2,749 Net gain on sale of investment and mortgage-backed securities 659 523 Brokerage fees 635 432 Commissions on insurance 4,140 3,085 Other agency income 373 256 Service charges and fees on deposit accounts 2,931 2,680 Loan servicing operations, net 2,122 (1,303 ) Real estate operations, net (197 )
(161 ) Other 1,273 1,019 Total other income 12,326 9,280 NON-INTEREST EXPENSE Salaries and employee benefits 11,302 10,770 Occupancy costs 1,261 1,314 Marketing 558 549 Depreciation, amortization, rental and maintenance of equipment 1,016 1,276 Prepayment penalties on FHLB advances 1,548 Other 4,117 3,389 Total non-interest expense 19,802 17,298 Income before income taxes 10,552 10,099 Income tax expense 3,850 3,614 NET INCOME $ 6,702 $ 6,485 NET INCOME PER COMMON SHARE BASIC $ 0.54 $ 0.51 NET INCOME PER COMMON SHARE DILUTED $ 0.52 $ 0.50 The accompanying notes are an integral part of the consolidated financial statements. 2
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended June 30, 2004 2003 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest and fees on loans $ 83,337 $ 96,110 Interest on mortgage-backed securities 10,676 5,375 Interest and dividends on investments 1,276 1,167 Other 53 98 Total interest income 95,342 102,750 INTEREST EXPENSE Interest on deposits 16,609 21,811 Interest on borrowed money 20,832 21,297 Total interest expense 37,441 43,108 NET INTEREST INCOME 57,901 59,642 Provision for loan losses 4,375 4,585 Net interest income after provision for loan losses 53,526 55,057 OTHER INCOME Net gain on sale of loans 1,344 7,311 Net gain on sale of investment and mortgage-backed securities 2,053 1,709 Brokerage fees 1,779 1,456 Commissions on insurance 12,007 9,354 Other agency income 1,065 765 Service charges and fees on deposit accounts 8,521 7,863 Loan servicing operations, net 1,387 (2,299 )
Real estate operations, net (656 )
(519 )
Other 3,716 3,333 Total other income 31,216 28,973 NON-INTEREST EXPENSE Salaries and employee benefits 33,841 32,764 Occupancy costs 3,900 3,901 Marketing 1,299 1,349 Depreciation, amortization, rental and maintenance of equipment 3,779 3,981 Prepayment penalties on FHLB advances 1,548 Other 11,745 10,306 Total non-interest expense 56,112 52,301 Income before income taxes 28,630 31,729 Income tax expense 10,284 11,367 NET INCOME $ 18,346 $ 20,362 NET INCOME PER COMMON SHARE BASIC $ 1.46 $ 1.58 NET INCOME PER COMMON SHARE DILUTED $ 1.42 $ 1.54 The accompanying notes are an integral part of the consolidated financial statements. 3
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Amounts in Thousands) (Unaudited) Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Stock Shares Amount Capital Income Income Shares Amount Total Balance at September 30, 2002 15,733 $ 157 $ 38,656 $ 158,680 $ 2,226 2,538 $ (34,071) $ 165,648 Net income 20,362 20,362 Other comprehensive loss: Unrealized net loss on securities available for sale, net of income tax (945 )
(945 )
Total comprehensive income 19,417 Common stock issued pursuant to stock option and employee benefit plans 102
1 1,655 1,656 Cash dividends ($.57 per share) (7,386 ) (7,386 )
Treasury stock purchased 685 (17,376) (17,376 )
Balance at June 30, 2003 15,835 $ 158 $ 40,311 $ 171,656 $ 1,281 3,223 $ (51,447) $ 161,959 Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Stock Shares Amount Capital Income Income (loss) Shares Amount Total Balance at September 30, 2003 15,870 $ 159 $ 41,106 $ 176,111 $ 672 3,348 $ (55,042) $ 163,006 Net income 18,346 18,346 Other comprehensive loss: Unrealized net loss on securities available for sale, net of income tax (3,055 )
(3,055 )
Total comprehensive income 15,291 Common stock issued pursuant to stock option and employee benefit plans 182
2 2,669 2,671 Cash dividends ($.66 per share) (8,274 ) (8,274 )
Treasury stock purchased 321 (9,469) (9,469 )
Balance at June 30, 2004 16,052 $ 161 $ 43,775 $ 186,183 $ (2,383 )
3,669 $ (64,511) $ 163,225 The accompanying notes are an integral part of the consolidated financial statements.
4
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30, 2004 2003 (Amounts in thousands) OPERATING ACTIVITIES (Unaudited) Net income $ 18,346 $ 20,362 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 3,498 3,057 Amortization of intangibles 289 270 Gain on sale of loans, net (1,344 ) (7,311 ) Gain on sale of investments and mortgage-backed securities, net (2,053 ) (1,709 ) (Gain) loss on sale of property and equipment, net (133 ) 86 Gain on sale of real estate owned, net (4 ) (219 ) Amortization of unearned discounts/premiums on investments, net 1,395 (279 ) Impairment loss from write-down of customer list intangible 41 Prepayment penalties on FHLB advances 1,548 Increase (decrease) in deferred loan fees and discounts (475 ) (416 ) Increase in receivables and other assets (4,070 ) (4,817 ) Provision for loan losses 4,375 4,585 Write down of real estate acquired in settlement of loans 62 16 Proceeds from sales of loans held for sale 164,844 378,502 Impairment (recovery) loss from write-down of mortgage servicing rights (241 ) 2,854 Origination of loans held for sale (178,257 ) (369,603 ) Decrease in accounts payable and other liabilities (2,690 ) (4,415 ) Net cash provided by operating activities 5,131 20,963 INVESTING ACTIVITIES Proceeds from maturity of investments available for sale 2,250 22,300 Proceeds from sales of investment securities available for sale 25,450 Net purchases of investment securities available for sale (44,892 ) (29,211 ) (Purchase) redemption of FHLB stock, net (7,700 ) 1,300 (Increase) decrease in loans, net (29,067 ) 103,847 Repayments on mortgage-backed securities available for sale 78,606 66,102 Proceeds from sales of mortgage-backed securities available for sale 69,258 38,671 Purchase of mortgage-backed securities available for sale (182,600 ) (203,122 ) Proceeds from the sales of real estate owned 1,504 2,314 Purchase of insurance subsidiaries (6,562 ) Net purchase of office properties and equipment (17,870 ) (5,680 ) Net cash used in investing activities (111,623 )
(3,479 )
FINANCING ACTIVITIES Net (decrease) increase in checking, passbook and money market fund accounts (3,176 ) 26,753 Net decrease in certificates of deposit (10,306 ) (4,100 ) Net proceeds (repayments) of FHLB advances 124,000 (8,000 ) Prepayment penalties on FHLB advances (1,548 ) Net increase in long-term borrowings 46,392 Costs associated with long-term debt (1,392 ) Decrease in other borrowed money (22,972 ) (137 ) Decrease in advances by borrowers for taxes and insurance (571 ) (1,439 ) Proceeds from the exercise of stock options 2,671 1,656 Dividends paid (8,274 ) (7,386 ) Treasury stock purchased (9,469 ) (17,376 ) Net cash provided by (used in) financing activities 115,355 (10,029 ) Net increase in cash and cash equivalents 8,863 7,455 Cash and cash equivalents at beginning of period 85,523 87,884 Cash and cash equivalents at end of period $ 94,386 $ 95,339 SUPPLEMENTAL CASH FLOW DATA Interest $ 39,478 $ 44,746 Income taxes 9,945 8,433 Significant non-cash investing and financing transactions: Loans transferred to other real estate owned 1,878 3,577 Loans securitized and reclassed from loans held for sale to mortgage-backed securities held for sale 27,516 Unrealized net loss on securities available for sale, net of income tax (3,055 )
(945 )
The accompanying notes are an integral part of the consolidated financial statements. 5
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of First Financial Holdings, Inc, ("First Financial", or the "Company"), its wholly-owned thrift subsidiary, First Federal Savings and Loan Association of Charleston ("First Federal" or the "Association"), First Southeast Insurance Services, Inc., Kimbrell Insurance Group, Inc. (see Note F, Mergers and Acquisitions) and First Southeast Investor Services, Inc. All significant intercompany items related to the consolidated subsidiaries have been eliminated.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity's activities. The Company consolidates voting interest entities in which it has all, or at least majority of, the voting interest. As defined in applicable accounting standards, variable interest entities ("VIEs") are entities that lack one or more of the characteristics of a voting interest entity described above. A controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company's wholly-owned trust subsidiary, First Financial Capital Trust I is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company's consolidated financial statements.
The significant accounting policies followed by First Financial for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The unaudited consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in First Financial's latest annual report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain fiscal 2003 amounts have been reclassified to conform to the statement presentations for fiscal 2004.
The results of operations for the nine months ended June 30, 2004 are not necessarily indicative of the results of operations that may be expected in future periods.
B. NATURE OF OPERATIONS
First Financial is a savings and loan holding company headquartered in Charleston, South Carolina. First Financial conducts its operations principally in South Carolina and has one full-service office located in North Carolina. The thrift subsidiary, First Federal, provides a wide range of traditional banking services and also offers investment, trust and insurance services through subsidiaries or affiliated companies. The Association has a total of 46 offices in South Carolina located in the Charleston
6
Metropolitan area and Horry, Georgetown, Florence and Beaufort counties, and Brunswick county, in coastal North Carolina.
C. ACCOUNTING ESTIMATES AND ASSUMPTIONS
Certain policies require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ significantly from these estimates and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, income taxes, mortgage servicing rights and purchase accounting.
D. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Variable Interest Entities
In accordance with FIN 46R, the Company did not include the trust subsidiary, First Financial Capital Trust I, in its consolidated financial statements at June 30, 2004. The trust subsidiary was formed to raise capital by issuing preferred securities to institutional investors. The Company owns 100% of the junior subordinated debt of the capital trust. This transaction increased the Company's long-term debt by $46.4 million, decreased debt associated with a line of credit with another bank by $24.1 million and increased cash by $22.3 million. Costs associated with the debt amounted to $1.4 million, which are included in other assets. The full and unconditional guarantee by the Company for the preferred securities remains in effect.
In accordance with FIN 46R, the Company, as primary beneficiary, included the subsidiary, Port City Ventures LLC, in its consolidated financial statements at June 30, 2004. The LLC was formed to take advantage of tax credits available through The State Housing Authority. Port City Ventures LLC is a 99.99% limited partner in North Central Apartments and will invest in the tax credits. The consolidation of the subsidiary increased other assets approximately $50 thousand.
In accordance with FIN 46R, the Company, as primary beneficiary, included the variable interest entity, FFSL I LLC, in its consolidated financial statements at June 30, 2004. The LLC was formed to purchase the Company's corporate operations center and adjacent property. The consolidation of the subsidiary increased fixed assets by approximately $16.1 million.
7
Application of Accounting Principles to Loan Commitments
In March 2004, Staff Accounting Bulletin ("SAB 105"), Application of Accounting Principles to Loan Commitments, was issued to provide guidance on recording a mortgage loan commitment on the balance sheet at fair value. SAB 105 provides specific guidance on the inputs to a valuation-recognition model to measure commitments accounted for at fair value. Current accounting guidance requires the loan commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding expected future cash flows related to the customer relationship or loan servicing. The reporting entity should determine the fair value of the loan commitment based solely on the relationship to market interest rates, absent any expected cash flows from the customer relationship o r servicing rights.
E. OTHER COMPREHENSIVE INCOME
Comprehensive income is the change in the Corporation's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income (loss) for the nine months ended June 30, 2004 and 2003 amounted to $15.3 million and $19.4 million, respectively.
The Corporation's "other comprehensive income (loss)" for the nine months ended June 30, 2004 and 2003 and "accumulated other comprehensive income" as of June 30, 2004 and September 30, 2003 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities.
Other comprehensive loss for the three months ended June 30, 2004 follows (in thousands):
Three Months Ended
2004 2003 Unrealized holding (losses) gains arising during period, net of tax $ (4,169 ) $ 195 Less: reclassification adjustment for realized gains, net of tax 418 336 Unrealized loss on securities available for sale, net of applicable income taxes $ (4,587 ) $ (141 ) 8
Other comprehensive loss for the nine months ended June 30, 2004 and 2003 follows (in thousands):
Nine Months Ended
2004 2003 Unrealized holding (losses) gains arising during period, net of tax $ (1,739 ) $ 152 Less: reclassification adjustment for realized gains, net of tax 1,316 1,097 Unrealized loss on securities available for sale, net of applicable income taxes $ (3,055 ) $ (945 ) F. MERGERS AND ACQUISITIONS
On February 28, 2003, First Financial acquired Woodruff & Company, Inc., an independent insurance agency based in Columbia, South Carolina. The Company recorded goodwill of $585 thousand and recorded a customer list intangible of $65 thousand. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is not deemed necessary.
On June 3, 2003, First Financial acquired customer access, claims administration and related assets for a group of customer accounts located in the southeast from MCA Administrators, Inc., which is based in Pittsburgh, Pennsylvania. The acquired assets were intangibles and consisted of a customer list valued at $100 thousand. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is not deemed necessary.On January 29, 2004, First Financial Holdings, Inc. acquired the following companies: The Kimbrell Company, Inc.; The Kimbrell Company, Inc./Florida; Preferred Markets, Inc.; Preferred Markets, Inc./Florida; and Atlantic Acceptance Corporation. The Kimbrell companies are a managing general agency specializing in placing coverage within the non-standard insurance market. Non-standard markets offer coverage to customers that have unusual or high-risk exposures. The Preferred Markets companies are a managing general agency specializing in placing coverage in standard insurance markets. Atlantic Acceptance Corporation is a premium finance company. Goodwill approximating $6.1 million was recorded in this transaction. The allocation to goodwill is preliminary as the value of other intangibles (if any) has not been determined at June 30, 2004. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is not deeme d necessary.
G. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization and impairment loss, at June 30, 2004, September 30, 2003 and June 30, 2003 are summarized as follows (in thousands):
June 30, September 30, June 30, 2004 2003 2003 Goodwill $ 21,132 $ 14,570 $ 14,312 Customer list 2,669 2,672 2,499 Less accumulated amortization (1,180 )
(891 )
(790 )
1,489 1,781 1,709 Total Intangibles
$ 22,621 $ 16,351 $ 16,021 9
The following summarizes the changes in the carrying amount of goodwill related to insurance operations for the nine months ended June 30, 2004 (in thousands):
First Southeast Kimbrell Insurance Insurance Services, Inc. Group, Inc.
Total
Balance, September 30, 2003 $ 14,570 $ - $ 14,570 Goodwill acquired 506 6,056 6,562 Balance, June 30, 2004 $ 15,076 $ 6,056 $ 21,132 The Company recorded an impairment loss of $41 thousand during the quarter ended June 30, 2004 as a result of the impairment evaluation of the customer list intangible that was determined at the time of acquisition.
The principals of Woodruff & Co. and Kinghorn Insurance received earn-outs based on performance, for periods defined in the separate purchase agreements of $75 thousand and $431 thousand, respectively.
Amortization of intangibles totaled $289 thousand, $371 thousand and $270 thousand for the nine months ended June 30, 2004, fiscal year ended September 30, 2003 and the nine months ended June 30, 2003, respectively.
The Company expects to record amortization expense related to intangibles of $388 thousand for fiscal years 2004 and 2005, $338 thousand for fiscal 2006, $266 thousand for fiscal 2007, $73 thousand for fiscal 2008 and an aggregate of $36 thousand for all years thereafter.
H. MORTGAGE SERVICING RIGHTS
The following summarizes the changes in the carrying amount of capitalized mortgage servicing rights ("MSRs") which are included in other assets for the nine months ended June 30, 2004, the fiscal year ended September 30, 2003 and the nine months ended June 30, 2003 (in thousands):
Mortgage Servicing Rights - nine months June 30, 2004 September 30, 2003 June 30, 2003 Balance at beginning of period $ 12,300 $ 9,115 $ 9,115 Capitalized mortgage servicing rights 2,332 6,275 4,707 Amortization (1,781 )
(3,147 )
(2,362 ) Change in valuation allowance 241 57 (2,854 ) Balance at end of period $ 13,092 $ 12,300 $ 8,606 At June 30, 2004, September 30, 2003 and June 30, 2003, respectively, the valuation allowance for capitalized MSRs totaled $581 thousand, $822 thousand and $3.7 million, respectively. In the nine months ended June 30, 2004 the Company recorded an impairment recovery from the valuation of MSRs of $241 thousand. This impairment recovery to the reserve was a direct result of higher interest rates at June 30, 2004 as compared to the quarter ended September 30, 2003 and estimates of lower prepayment speeds of loans included in the Company's mortgage servicing asset. For fiscal year 2003 and the nine
10
months ended June 30, 2003 the Company recorded an impairment recovery of $57 thousand and an impairment loss of $2.9 million from the valuation of MSRs, respectively.
The estimated amortization expense for mortgage servicing rights for future years ending September 30 is as follows: $2.3 million for 2004, $2.1 million for 2005, $1.9 million for 2006, $1.7 million for 2007, $1.6 million for 2008 and $5.9 million thereafter. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.
I. DERIVATIVES AND FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137, 138 and 149, establishes accounting and reporting standards for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.
The Company has identified the following derivative instruments which were recorded on the Company's balance sheet at June 30, 2004: commitments to originate fixed-rate and certain other residential loans held for sale and forward sales commitments.
The Company originates certain fixed-rate and adjustable-rate residential loans with the intention of selling these loans. Between the time that the Company enters into an interest rate lock or a commitment to originate a fixed-rate residential loan with a potential borrower and the time the closed loan is sold, the Company is subject to variability in market prices related to these commitments. The Company believes that it is prudent to limit the variability of expected proceeds from the sales through forward sales of "to be issued" mortgage-backed securities and loans ("forward sales commitments"). The commitments to originate fixed-rate conforming loans totaled $21.2 million at June 30, 2004. It is anticipated 80% of these loans will close totaling $17.0 million. The fair value of the $17.0 million is an asset of $118 thousand at June 30, 2004. The fair value of forward sales commitments of $17.5 million of "to be issued" mortgage-backed securities, a liabili ty, was $234 thousand at June 30, 2004.
J. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") have been computed based upon net income as presented in the accompanying statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
Three Months Ended June 30, 2004 2003 Weighted average number of common shares used in basic EPS 12,494,432 12,635,556 Effect of dilutive stock options 300,113 346,980 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,794,545 12,982,536 11
Nine Months Ended June 30, 2004 2003 Weighted average number of common shares used in basic EPS 12,532,142 12,908,770 Effect of dilutive stock options 350,578 337,710 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,882,720 13,246,480 For the three and nine months ended June 30, 2004 and 2003 there were 142,435 and 41,800 option shares, respectively, that were excluded from the calculation of diluted earnings per share because the exercise prices of $29.92 and $32.28 for the nine months ended June 30, 2004 and $27.28 and $29.35 for the nine months ended June 30, 2003, respectively, were greater than the average market price of the common shares.
K. STOCK-BASED COMPENSATION
At June 30, 2004, the Company had four stock-based employee and director option plans, which are described more fully in Note 16 of the Notes To Consolidated Financial Statements included in the Company's 10-K for September 30, 2003. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee or director compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123, "Accounting for Stock-Based Compensation", to stock-based employee and non-employee compensation (amounts in thousands except for per share amounts).
Three Months Ended June 30, Nine Months Ended June 30, 2004
2003 2004
2003 Net income, as reported $ 6,702 $ 6,485 $ 18,346 $ 20,362 Deduct: Total stock-based employee and director compensation expense determined under fair value based method for all awards, net of related tax effects. (219 )
(186 )
(655 )
(515 ) Pro forma net income $ 6,483 $ 6,299 $ 17,691 $ 19,847 Earnings per share: Basic - as reported $ 0.54 $ 0.51 $ 1.46 $ 1.58 Basic - pro forma $ 0.52 $ 0.50 $ 1.41 $ 1.54 Diluted - as reported $ 0.52 $ 0.50 $ 1.42 $ 1.54 Diluted - pro forma $ 0.51 $ 0.49 $ 1.37 $ 1.50 12
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants in the nine-months ended June 30, 2004 and 2003, respectively: dividend yield of 3.05% and 2.80%, expected volatility of 38.1% and 41.3%, risk-free interest rate of 3.75% and 2.89%, expected lives of 6 years and a vesting period ranging from one to five years. The weighted average fair value of options granted approximated $10.22 for the nine-months ended June 30, 2004 and $6.60 for the nine-months ended June 30, 2003. For purposes of the proforma calculation, compensation expense is recognized on a straight line basis over the vesting period. The Company's directors also participate in a stock awards plan providing non-employee directors with an opportunity to increase their equity interests in the Company based on the attainment of specific performance criteria for the Company and the Assoc iation. Shares awarded under the stock awards plan are expensed in the appropriate periods. As part of this plan, 19,971 and 25,433 shares were awarded to directors during the nine months ended June 30, 2004 and 2003, respectively.
L. BUSINESS SEGMENTS
The Company has two principal operating segments, banking and insurance, which are evaluated regularly by Management and the Board of Directors in deciding how to allocate resources and assess performance. Both of these segments are reportable segments by virtue of exceeding certain quantitative thresholds.
First Federal, the Company's primary operating segment, engages in general banking business focusing on mortgage, consumer and commercial lending to small and middle market businesses and consumers in its markets. First Federal also provides demand transaction accounts and time deposit accounts to businesses and individuals. First Federal offers products and services primarily to customers in its market areas consisting of counties in Coastal South Carolina and North Carolina from the Hilton Head area of Beaufort County to the Sunset Beach area of Brunswick County, North Carolina and Florence County. Revenues for First Federal are derived primarily from interest and fees on loans, interest on investment securities, service charges on deposits and other customer service fees.
First Southeast Insurance Services, Inc. operates as an independent insurance agency and brokerage through eleven offices, seven located throughout the coastal region of South Carolina, two offices in Florence County and one office each in Columbia and Lake Wylie, South Carolina with revenues consisting principally of commissions paid by insurance companies. The Kimbrell Insurance Group, Inc. (acquired in January 2004) operates as a managing general agency and brokerage through one office, located in the coastal region of South Carolina with revenues consisting principally of commissions paid by insurance companies. Also part of The Kimbrell Insurance Group, Inc. is Atlantic Acceptance Corporation, Inc., which finances insurance premiums generated by affiliated or non-affiliated customers. No single customer accounts for a significant amount of the revenues of either reportable segment. The Company evaluates performance based on budget to actual comparisons and segment profit s. The accounting policies of the reportable segments are the same as those described in Note A.
Segment information is shown in the tables below. The "Other" column includes all other business activities that did not meet the quantitative thresholds and therefore are not shown as a reportable segment (in thousands). Certain passive activities of First Financial are also included in the "Other" column.
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Three months ended June 30, 2004 Insurance Banking Activities Other Total Interest income $
31,437 $ 64 $ 44 $ 31,545 Interest expense 11,593 12 787 12,392 Net interest income 19,844 52 (743 )
19,153 Provision for loan losses 1,125 1,125 Other income 7,111 123 579 7,813 Commissions on insurance and other agency income 73 4,440 4,513 Non-interest expenses 13,760 3,488 909 18,157 Amortization of intangibles 97 97 Prepayment penalties on FHLB advances 1,548 1,548 Income tax expense 3,829 393 (372 )
3,850 Net income $
6,766 $ 637 $ (701 )
$ 6,702 Nine months ended June 30, 2004 Insurance Banking Activities Other Total Interest income $
95,106 $ 132 $ 104 $ 95,342 Interest expense 36,214 31 1,196 37,441 Net interest income 58,892 101 (1,092 )
57,901 Provision for loan losses 4,375 4,375 Other income 16,384 154 1,606 18,144 Commissions on insurance and other agency income 270 12,802 13,072 Non-interest expenses 41,824 9,652 2,799 54,275 Amortization of intangibles 289 289 Prepayment penalties on FHLB advances 1,548 1,548 Income tax expense 9,969 1,123 (808 ) 10,284 Net income $ 17,830 $ 1,993 $ (1,477 ) $ 18,346 June 30, 2004 Total assets $ 2,402,247 36,240 13,385 $ 2,451,872 Loans $ 1,810,793 1,669 $ 1,812,462 Deposits $ 1,473,239 (5,070 )
$ 1,468,169 14
Three months ended June 30, 2003 Insurance Banking Activities Other Total Interest income $ 32,985 $
(5 )
$ 18 $ 32,998 Interest expense 13,202 229 13,431 Net interest income 19,783 (5 )
(211 )
19,567 Provision for loan losses 1,450 1,450 Other income 5,552 14 373 5,939 Commissions on insurance and other agency income 95 3,246 3,341 Non-interest expenses 13,923 2,560 725 17,208 Amortization of intangibles 90 90 Income tax expense 3,601 216 (203 )
3,614 Net income $ 6,456 $
389 $ (360 )
$ 6,485 M. GUARANTEES
Nine months ended June 30, 2003 Insurance Banking Activities Other Total Interest income $ 102,669 $
(18 )
$ 99 $ 102,750 Interest expense 42,394 5 709 43,108 Net interest income 60,275 (23 )
(610 )
59,642 Provision for loan losses 4,585 4,585 Other income 17,541 31 1,282 18,854 Commissions on insurance and other agency income 296 9,823 10,119 Non-interest expenses 42,408 7,380 2,243 52,031 Amortization of intangibles 270 270 Income tax expense 11,142 786 (561 ) 11,367 Net income $ 19,977 $
1,395 $ (1,010 ) $ 20,362 June 30, 2003 Total assets $ 2,243,525 $
22,069 $ 3,451 $ 2,269,045 Loans $ 1,811,647 $ 1,811,647 Deposits $ 1,466,146 $ (3,222 ) $ 1,462,924 Standby letters of credit represent an obligation of the Company to a third party contingent upon the failure of the Company's customer to perform under the terms of an underlying contract with the third party or obligate the Company to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer's delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will generally be drawn only when the underlying event fails to occur as intended. The Company can seek recovery of the amounts paid from the borrower. In addition, some of these standby letters of credit are collateralized. Commitments under standby letters of credit are usually for one year or less. No contingent liability was determined to be necessary relating to the Company's obligation to perfor m as a guarantor, since such amounts are not considered material. The maximum potential amount of undiscounted future payments related to standby letters of credit at June 30, 2004 was $3.5 million.
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N. DEBT ASSOCIATED WITH TRUST PREFERRED SECURITIES
On March 19, 2004, First Financial Capital Trust I ("the Capital Trust I"), a wholly owned subsidiary of the Company, issued and sold $45 million aggregate liquidation amount of 7.0% capital securities, Series A (liquidation amount $1,000 per capital security) of the Capital Trust I, referred to as the capital securities.
The Capital Trust I is a statutory business trust created for the purposes of issuing and selling the capital securities; using the proceeds from the sale of the capital securities and common securities to acquire junior subordinated deferrable interest debt securities, referred to as the junior subordinated debt securities, issued by the Company; and engaging in only those other activities necessary, advisable or incidental to the above. The junior subordinated debt securities will be the sole assets of the Capital Trust I, and payments under the junior subordinated debt securities will be the sole revenues of the Trust. The Company owns all of the common securities of the Trust. The Company's obligations under the junior subordinated debt securities are unsecured and subordinated to payment of the senior and subordinated debt.
Distributions will be payable quarterly in arrears beginning on July 7, 2004, and upon redemption, at a fixed annual rate equal to 7% of the aggregate liquidation amount of the capital securities. The Company has the right, subject to events of default relating to the junior subordinated debt securities, to defer interest payments on the junior subordinated debt securities for up to 20 consecutive quarterly periods. All such extensions will end on an interest payment date and will not extend beyond April 6, 2034, the stated maturity date of the junior subordinated debt securities, or beyond any optional redemption date or special event redemption date.
The Company may redeem all or part of the junior subordinated debt securities at any time on or after April 7, 2009. In addition, the junior subordinated debt securities may be redeemed in whole but not in part, at any time prior to April 7, 2009 if certain tax events occur; there is a change in the way the capital securities would be treated for regulatory capital purposes; and there is a change in the Investment Company Act of 1940, that requires the Trust to register under that law.
All of the proceeds from the sale by the Trust of its capital securities and common securities were invested by the Trust in the junior subordinated debt securities which the Company will utilize to pay off a $24.1 million line of credit with another bank. The remainder of the net proceeds was retained for working capital and other corporate purposes, which may include stock repurchases and potential acquisitions, as well as contributions to First Federal to support its future growth.
First Financial Capital Trust I is currently offering to exchange its 7% Capital Securities, Series B (liquidation amount $1,000 per capital security) which have been registered under the Securities Act of 1933 for any and all of its outstanding 7% Capital Securities, Series A (liquidation amount $1,000 per capital security).
O. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to various legal proceedings and claims that have arisen in the ordinary course of its business. In the opinion of management based on consultation with external legal counsel, any reasonably foreseeable outcome of such current litigation would not materially affect the Company's consolidated financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF FORWARD-LOOKING STATEMENTS
This report may contain certain forward-looking statements with respect to financial conditions, results of operations and business of First Financial. These forward-looking statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Company's actual results, performance or achievements may differ materially from those suggested, expressed or implied by forward-looking statements due to a wide range of factors including, but not limited to, the general business environment, gener al economic conditions nationally and in the State of South Carolina, interest rates, the South Carolina real estate market, competitive conditions between banks and non-bank financial services providers, regulatory changes and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended September 30, 2003. Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to update this information.
OVERVIEW
First Financial Holdings, Inc. ("First Financial" or the "Company") is a savings and loan holding company incorporated under the laws of Delaware in 1987. The Company is headquartered in Charleston, South Carolina and operates First Federal Savings and Loan Association of Charleston ("First Federal" or the "Association"). Insurance agency operations are conducted under other First Financial subsidiaries, First Southeast Insurance Services, Inc. ("FSIns.") and Kimbrell Insurance Group, Inc. ("Kimbrell"). The Company also owns First Southeast Investor Services, Inc. ("FSIS"), a South Carolina corporation organized in 1998 for the purpose of operating as a broker-dealer.
First Federal, chartered in 1934, is the largest financial institution headquartered in the Charleston, South Carolina metropolitan area and the third largest financial institution headquartered in South Carolina based on asset size. First Federal is a federally-chartered stock savings and loan association that conducts its business through operation centers located in Charleston and Conway along with 38 full service retail branch sales offices, five in-store (Wal-Mart Supercenters) retail branch sales offices, and three limited service branches located in the following counties: Charleston County (16), Berkeley County (2), Dorchester County (4), Hilton Head area of Beaufort County (3), Georgetown County (2), Horry County (13), Florence County (5) and the Sunset Beach area of Brunswick County North Carolina (1).
The business of the Company consists primarily of acting as a financial intermediary by attracting deposits from the general public and using such funds, together with borrowings and other funds, to originate first mortgage loans on residential properties located in its primary market areas. The Company also makes construction, consumer, non-residential mortgage and commercial business loans and invests in mortgage-backed securities, federal government and agency obligations, money market obligations and certain corporate obligations. Through its own subsidiaries or subsidiaries of the Association, the
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Company also engages in full-service brokerage activities, property, casualty, life and health insurance, premium financing, third party administrative services, trust and fiduciary services, reinsurance of private mortgage insurance and certain passive investment activities.
THIRD QUARTER HIGHLIGHTS
Net income for the quarter ended June 30, 2004 increased 3.3% to $6.7 million from net income of $6.5 million in the comparable quarter in fiscal 2003. Basic earnings per common share increased 5.9% to $.54 per common share for the current quarter compared to the June 2003 quarter. On a diluted basis, earnings per common share increased to $.52 from $.50 in the comparable period.
Highlights of operations during the third quarter included growth in non-interest revenues, lower provision for loan losses, lower net interest income and higher general and administrative expenses. Non-interest revenues improved by $3.0 million during the current quarter when compared to the quarter ended June 30, 2003. Loan servicing operations, net, increased $3.4 million compared to the June 2003 quarter. Included in this $3.4 million increase was the effect of a $1.7 million impairment recovery on the Company's originated mortgage servicing asset during the June 2004 quarter compared to a $1.4 million impairment charge incurred during the June 2003 quarter. Insurance revenues increased $1.2 million, or 35.1%, compared to the June 2003 quarter. This increase in insurance revenues was principally a result of acquisitions in the second quarter which added approximately $1.1 million to revenues. On a comparative basis, the net gain recorded on the sale of loans significan tly decreased by $2.4 million in the June 2004 quarter as compared with the net gain recorded during the June 2003 quarter.
Net interest income declined by approximately $414 thousand, or 2.1%, between the quarters ended June 30, 2004 and June 30, 2003. The decline was principally attributable to a reduction in the company's net interest margin to 3.36% in the quarter ended June 30, 2004 from 3.75% during the quarter ended June 30, 2003, offset partially by $195.6 million in higher average earning asset balances, most of which was due to growth in mortgage-backed and other investment securities.
Credit quality indicators improved during the quarter and the provision for loan losses declined by $325 thousand, or 22.4%, compared with the comparable quarter during fiscal 2003.
Operating costs increased $2.5 million, or 14.5% during the current quarter. Included in the $2.5 million increase in operating costs were prepayment fees of $1.5 million incurred to prepay $70 million of FHLB advances. Excluding prepayment fees, operating costs increased $956 thousand, or 5.5%, compared to the quarter ended June 30, 2003.
One of the Company's goals continues to be expansion of non-interest revenues with this goal being achieved by an emphasis over the past several years in acquiring additional insurance agencies. Another focus has been to add business and consumer households through the opening of primary account relationships so that additional products and services may be generated. The Company believes an emphasis on quality staffing, local decision-making authority and a strong culture of sales and service excellence will be necessary to achieve future success.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are discussed in Item 8, Note 1 to the Consolidated Financial Statements of the 10K for September 30, 2003. Of these significant accounting policies, the Company has determined that accounting for allowance for loan losses, income taxes, mortgage servicing rights and
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purchase accounting are deemed critical because of the valuation techniques used, and the sensitivity of these financial statement amounts to the methods, assumptions and estimates underlying these balances. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded in the financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include lending commitments and derivatives, are described below.
Lending Commitments. Lending Commitments include loan commitments, standby letters of credit, unused business and consumer credit lines, and documentary letters of credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the course of business. The Company applies essentially the same credit policies and standards as it does in the lending process when making these commitments.
For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. For retail customers, loan commitments are generally lines of credit secured by residential property. At June 30, 2004, commercial and retail loan commitments and the undisbursed portion of construction loans totaled $91.9 million. Unused business, personal and credit card lines, which totaled $264.1 million at June 30, 2004, are generally for short-term borrowings.
Derivatives. In accordance with SFAS No. 133, the Company records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheets. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged, but is used only as the basis upon which interest and other payments are calculated. See Note I in the Notes to Consolidated Financial Statements.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement benefit plans that provide health care, life insurance and other postretirement benefits to retired employees. The health care plans generally include participant contributions, co-insurance provisions, limitations on the Company's obligation and service-related eligibility requirements. The Company pays these benefits as they are incurred. Postretirement benefits for employees hired after January 1, 1989 and those electing early retirement or normal retirement after January 1, 1999, were substantially curtailed. The Company's other postretirement benefits are discussed more fully in Item 8, Note 16 to the Consolidated Financial Statements of the 10K for September 30, 2003.
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The components of net periodic benefit costs for the three months ended June 30, 2004 and 2003 are shown in the following statement (in thousands):
Other Postretirement Benefits Three months ended June 30, 2004 2003 Interest Cost $ 30 $ 32 Amortization of transition obligation 25 23 $ 55 $ 55 The components of net periodic benefit costs for the nine months ended June 30, 2004 and 2003 are shown in the following statement (in thousands):
Other Postretirement Benefits Nine months ended June 30, 2004 2003 Interest Cost $ 90 $ 96 Amortization of transition obligation 75 69 $ 165 $ 165 The Company previously disclosed in its financial statements for the year ended September 30, 2003, that it expected to contribute $218 thousand to its postretirement benefit plan in fiscal year 2004. As of June 30, 2004, $165 thousand of contributions have been made. The Company presently does not anticipate any change in contributions to fund postretirement plan obligations in fiscal 2004.
On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. The Financial Accounting Standards Board (FASB) issued a Staff Position, FAS 106-2 on May 9, 2004 which is effective for the first interim or annual reporting period beginning after June 15, 2004. Measures of the company's accumulated postretirement benefit obligation or net periodic retirement benefit cost do not reflect any amount associated with the subsidy because the Company has not been able to conclude whether the benefits provided by plan are actuarially equivalent to Medicare Part D under the Act.
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BALANCE SHEET ANALYSIS
Total assets of First Financial increased $129 million, or 5.6%, during the nine months ended June 30, 2004. The following table shows the variances in dollars and percent change between the Consolidated Statements of Financial Condition for First Financial at June 30, 2004 and September 30, 2003:
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, September 30, 2004 2003 (Amounts in thousands) (Unaudited) Variance % Change ASSETS Cash and cash equivalents $
94,386 $ 85,523 $ 8,863 10.36 % Investments available for sale, at fair value 30,951 13,787 17,164 124.49 Investment in capital stock of FHLB, at cost 37,600 29,900 7,700 25.75 Loans receivable, net of allowance of $14,780 and $14,957 1,805,170 1,781,881 23,289 1.31 Loans held for sale 7,292 20,051 (12,759 ) (63.63 )
Mortgage-backed securities available for sale, at fair value 361,409 303,470 57,939 19.09 Intangible assets 22,621 16,351 6,270 38.35 Other assets 92,443 71,919 20,524 28.54 Total assets $ 2,451,872 $ 2,322,882 $ 128,990 5.55 % LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,468,169 $ 1,481,651 $ (13,482 ) (0.91 )% Advances from Federal Home Loan Bank 722,000 598,000 124,000 20.74 Other short-term borrowings 1,103 24,075 (22,972 ) (95.42 )
Long-term debt 46,392 46,392 100.00 Other liabilities 50,983 56,150 (5,167 ) (9.20 )
Total liabilities 2,288,647 2,159,876 128,771 5.96 % Stockholders' equity 163,225 163,006 219 0.13 Total liabilities and stockholders' equity $ 2,451,872 $ 2,322,882 $ 128,990 5.55 % Investment Securities and Mortgage-backed Securities
Investments available for sale increased $17.2 million during the nine months ended June 30, 2004 primarily from net proceeds of the Company's issuance of debt securities.
Investments and mortgage-backed securities increased in the first nine months of fiscal 2004 as a result of efforts by the Company to increase earning assets and provide additional gross interest income to offset the effects of lower loan originations. Purchases of mortgage-backed securities totaled $182.6 million during the nine months ended June 30, 2004. These purchases were of highly rated securities with average durations of 2.5 to 5 years. The Company also swapped $27.5 million of 1-4 family residential mortgages for additional mortgage-backed securities. During the nine-month period sales of mortgage-backed securities totaled $69.3 million and repayments totaled $78.6 million. The Company has presently funded this net growth in investments and mortgage-backed securities principally with short-term borrowings and proceeds from the Company's issuance of debt securities.
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Loans Receivable
Net loans receivable increased only slightly during the nine months ended June 30, 2004. As a result of historically low interest rates, consumers continue to prefer fixed-rate residential loan products, resulting in higher repayments of certain of the Company's normal portfolio loan products, such as adjustable-rate mortgage loans. Loans held for sale decreased dramatically as a result of lower originations from refinance activity in the nine months ended June 30, 2004 as compared with the production levels at the end of fiscal 2003.
The following table summarizes outstanding loans by collateral type for real estate secured loans and by borrower type for all other loans. Collateral type represents the underlying assets securing the loan, rather than the purpose of the loans (in thousands):
June 30, September 30, June 30, 2004 2003 2003 Real estate - residential mortgages (1-4 family) $ 1,011,645 $ 1,104,578 $ 1,090,339 Real estate - residential construction 70,131 35,518 56,836 Commercial secured by real estate including multi-family 213,828 210,315 195,049 Commercial financial and agricultural 57,098 43,621 42,093 Land 94,301 87,844 88,499 Home equity loans 177,650 154,787 160,211 Mobile home loans 140,185 129,934 125,806 Credit cards 11,771 11,601 11,855 Other consumer loans 90,311 81,000 85,166 Total gross loans 1,866,920 1,859,198 1,855,854 Less: Allowance for loan losses 14,780 14,957 15,130 Loans in process 40,293 42,448 29,391 Deferred loan fees and discounts on loans (615 )
(139 )
(314 )
54,458 57,266 44,207 Total $ 1,812,462 $ 1,801,932 $ 1,811,647 The Company's focus in past months has been to sell newly originated agency-qualifying fixed-rate loans into the secondary market. As a result of record low interest rates and a long period of refinance activity, residential loan balances have declined. To offset this decline in residential real estate loans the Company has increased emphasis on the origination of commercial business and consumer loans.
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Asset Quality
The following table summarizes the Company's problem assets at the periods indicated (amounts in thousands):
June 30, September 30, June 30, 2004 2003 2003 Non-accrual loans $ 8,605 $ 9,852 $ 10,006 Loans 90 days or more delinquent (1) 98 24 31 Renegotiated loans 295 297 Real estate and other assets acquired in settlement of loans 4,325 4,009 4,074 Total $ 13,028 $ 14,180 $ 14,408 As a percent of net loans and real estate owned 0.72 % 0.79 % 0.79 % As a percent of total assets 0.53 % 0.61 % 0.63 % (1) The Company continues to accrue interest on these loans. Problem assets decreased $1.2 million during the nine months ended June 30, 2004 from September 30, 2003. The change was principally related to a decline of $1.2 million in non-accruing loans. The decrease in non-accrual loans was principally related to decreases in construction residential, single family residential, five or more residential, commercial real estate, commercial business, auto, mobile homes and other consumer loans offset by increases in delinquent land and home equity loans.
Similar to other parts of the country, the markets served by the Company are experiencing slower economic growth, sectors with higher levels of unemployment, higher bankruptcy filings and higher delinquency rates. The Company's largest concentration of loans is in the Residential (1-4 family) market. There is no concentration of loans in any particular industry or group of industries. Most of the Company's residential and business loans are with customers located within the coastal counties of South Carolina, Florence County and Brunswick County in North Carolina.
Allowance for Loan Losses
The Company provides for loan losses on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment, deserve current recognition in estimating losses. Such factors considered by management include the fair value of the underlying collateral, growth and composition of the loan portfolios, loss experience, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is subject to periodic evaluation by various regulatory aut horities and may be subject to adjustment upon their examination.
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Following is a summary of the allowance for loan losses (in thousands):
At and for the nine months ended June 30, 2004 2003 Balance at beginning of year $ 14,957 $ 15,824 Provision charged to operations 4,375 4,585 Recoveries of loans previously charged-off 531 389 Loan losses charged to reserves (5,083 )
(5,668 )
Balance at end of period $ 14,780 $ 15,130 Net charge-offs for the nine months ended June 30, 2004 and June 30, 2003 totaled $4.6 million and $5.3 million, respectively. Consumer net charge-offs totaled $3.5 million in the current nine months compared to $3.3 million in the comparable nine months in fiscal 2003. Real Estate (residential and commercial) and commercial business loan net charge-offs decreased to $620 thousand and $393 thousand, respectively, in the current nine months, compared to $914 thousand and $1.0 million, respectively, in the nine months ended June 30, 2003. Annualized net charge-offs as a percentage of average net loans decreased by 4 basis points to .34% for the nine months ended June 30, 2004 as compared to the nine months ended June 30, 2003 and decreased from .39% to .24% for the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003.
Over recent years the Company has been successful in increasing originations of consumer and commercial business loans which typically have higher rates of delinquency and greater risk of loss than single-family real estate loans but are shorter in duration and have less interest rate risk. These loans represent approximately 26% of the gross loan portfolio.
The Company's impaired loans totaled $1.1 million at June 30, 2004, $1.7 million at September 30, 2003 and $1.8 million at June 30, 2003. The decrease in impaired loans for the nine months ended June 30, 2004 as compared to the nine months ended June 30, 2003 was due mainly to a reduction in impaired commercial business loans.
Other Assets
Other assets increased $20.5 million, or 28.5%, during the nine months ended June 30, 2004 primarily as a result of a net increase of $14.5 million in office properties from the purchase of the Summit office building of $16.1 million and the deferred costs of $1.4 million associated with the issuance of the Trust Preferred Securities.
Deposits and Borrowings
First Financial's deposit composition at the indicated dates is as follows (amounts in thousands):
June 30, 2004 September 30, 2003 June 30, 2003 Balance % of Total Balance %of Total Balance % of Total Checking accounts $ 416,240 28.35 % $ 398,491 26.90 % $ 385,388 26.34 % Statement and other accounts 164,112 11.18 150,707 10.17 143,785 9.83 Money market accounts 244,652 16.66 278,982 18.83 279,331 19.09 Certificate accounts 643,165 43.81 653,471 44.10 654,420 44.73 Total deposits $ 1,468,169 100.00 % $ 1,481,651 100.00 % $ 1,462,924 100.00 % 24
Deposits decreased $13.5 million during the nine months ended June 30, 2004, principally as a result of decreases of $34.3 million in money market accounts and $10.3 million in certificate accounts with offsets from increases in checking accounts, statement savings and other accounts of $31.2 million. Included in the net change in deposits and in checking accounts for the nine months ended June 30, 2004 is the net effect of a $19.3 million decrease in the account balances maintained for investors in the servicing of loans previously sold in the secondary market. As the refinancing of loans has slowed during the past nine months, funds due to investors have decreased accordingly. Also, as a result of lower loan volumes, the Company has increased its investment in mortgage-backed securities and investment securities resulting in increases in FHLB advances of $124 million offset by decreases in other short-term borrowings of $23 million during the first nine months of fiscal 2 004. Long-term debt increased by $46.4 million as a result of the issuance of the Company's capital securities.
Stockholders' Equity
The Company's capital ratio, total capital to total assets, was 6.66% at June 30, 2004, compared to 7.02% at September 30, 2003. The Company's tangible capital ratio was 5.79% at June 30, 2004 compared to 6.36% at September 30, 2003. During the nine months, the Company increased its dividend to stockholders to $.66 compared with $.57 per share in the first nine months of fiscal 2003. During the quarter ended June 30, 2003 the Company announced approval of a stock repurchase program to acquire up to 650 thousand shares of Common Stock. This plan has subsequently been extended until November 30, 2004. During the first nine months of fiscal 2004 the Company purchased approximately 302 thousand shares under this program at a cost of $8.9 million, with approximately 205 thousand shares remaining in the plan to be acquired. The capital ratio was also affected by a decline in the market value of investments and mortgage-backed securities available for sale as of June 30, 2004 compared with the comparable value at September 30, 2003.
Regulatory Capital
Under current Office of Thrift Supervision ("OTS") regulations, savings associations must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. At June 30, 2004, the Association was categorized as "well capitalized" under the Prompt Corrective Action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To remain in this status, the Association must maintain core and risk-based, Tier 1 risk-based, and Tier 1 core ("leverage") ratios as set forth in the below table. There are no conditions or events since that date that management believes have changed the institution's category.
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The following table summarizes the capital requirements for First Federal as well as its capital position at June 30, 2004 (amounts in thousands):
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of June 30, 2004: Tangible capital (to Total Assets) $ 168,563 7.01 % $ 36,092 1.50 % Core capital (to Total Assets) 168,563 7.01 96,246 4.00 $ 120,308 5.00 % Tier I capital (to Risk-based Assets) 168,563 10.55 94,618 6.00 Risk-based capital (to Risk-based Assets) 181,205 11.49 126,158 8.00 157,697 10.00 For a complete discussion of capital issues, refer to "Capital Requirements" and "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 2003.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The Association is subject to federal regulations requiring it to maintain adequate liquidity to assure safe and sound operations.
The Association's primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB, principal repayments on loans and mortgage-backed securities, securities sold under agreements to repurchase and the sale of loans. Each of the Association's sources of liquidity is subject to various uncertainties beyond the control of the Association. As a measure of protection, the Association has back-up sources of funds available, including excess borrowing capacity and excess liquidity in securities available for sale. The table below summarizes future contractual obligations as of June 30, 2004 (in thousands).
At June 30, 2004 Payments Due by Period Within Over One Over Two Over Three One to Two to Three to Five After Five Year Years Years Years Years Total Certificate accounts $ 360,218 $ 153,806 $ 61,951 $ 61,493 $ 5,697 $ 643,165 Borrowings 408,103 75,000 75,000 15,000 196,392 769,495 Operating leases 820 761 575 653 111 2,920 Total contractual obligations $ 769,141 $ 229,567 $ 137,526 $ 77,146 $ 202,200 $ 1,415,580 The Association's use of FHLB advances is limited by the policies of the FHLB. Based on the current level of advances, asset size and available collateral under the FHLB programs, the Association at June 30, 2004, estimates that an additional $72.9 million of funding is available. At June 30, 2004, the Association has approximately $202.9 million of unpledged investments and mortgage-backed securities available for sale. At June 30, 2004, the Association maintained collateral at the Federal Reserve of Richmond, sufficient to ensure that approximately $21.2 million is available from the "Discount Window". All of the above liquidity sources give the Association approximately $297.0 million capacity to meet future funding demands. These investments are available should deposit cash flows and other funding be
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reduced in any given period. Should the Association so desire, it may request additional availability at the FHLB, subject to standard lending policies in effect at the FHLB.
During the current nine months the Company experienced a net cash outflow from investing activities of $111.6 million consisting principally of purchases of investments and mortgage-backed securities available for sale of $227.5 million offset by repayments of mortgage-backed securities and proceeds from sales and maturities of mortgage-backed securities and investments of $175.6 million, a net increase of $29.1 million in net loans receivable, net purchases of FHLB stock of $7.7 million, purchase of insurance subsidiaries of $6.6 million and net purchase of office properties and equipment of $17.9 million. The Company experienced cash inflows of $5.1 million and $115.4 million from operating activities and financing activities, respectively. Financing activities consisted principally of increases of $124 million in FHLB advances, long-term debt of $46.4 million and proceeds from exercise of stock options of $2.7 million offset by decreases in deposits of $13.5 million, prep ayment penalties of FHLB advances and costs associated with long-term debt of $2.9 million, decrease in other borrowed money of $23.0 million, dividends paid of $8.3 million and purchases of treasury stock of $9.5 million during the first nine months of the 2004 fiscal year. Other short-term borrowings were reduced by the pay-off of the Company's line of credit from proceeds of sale of trust preferred securities.
Parent Company Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. Unlike the Association, First Financial is not subject to any regulatory liquidity requirements. Potential sources for First Financial's payment of principal and interest on its borrowings and for its future funding needs include (i) dividends from First Federal and other subsidiaries; (ii) payments from existing cash reserves and sales of marketable securities; and (iii) interest on its investment securities.
First Federal's ability to pay dividends and make other capital contributions to First Financial is restricted by regulation and may require regulatory approval. First Federal's ability to make distributions may also depend on its ability to meet minimum regulatory capital requirements in effect during the period. For a complete discussion of capital distribution regulations, refer to "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 2003.
Asset/Liability Management
The Company's Asset and Liability Committee establishes policies and monitors results to control interest rate sensitivity. Although the Company utilizes measures such as static and dynamic gap, which are measurements of the differences between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period including modeling that includes and excludes loan prepayment assumptions. More important may be the process of evaluating how particular assets and liabilities are affected by changes in interest rates or selected indices as they reprice. Asset/liability modeling is performed by the Company to assess varying interest rate and balance mix assumptions.
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The following table is a summary of the Company's one year dynamic gap at June 30, 2004 (amounts in thousands):
June 30, 2004 Interest-earning assets maturing or repricing within one year $ 1,003,779 Interest-bearing liabilities maturing or repricing within one year 1,135,289 Cumulative gap $ (131,510 )
Gap as a percent of total assets (5.36 )% Based on the Company's June 30, 2004 dynamic gap position, which considers expected prepayments of loans, in a one-year time period $1.0 billion in interest-earning assets will reprice and approximately $1.1 billion in interest-bearing liabilities will reprice. This current dynamic gap position results in a negative one-year gap position of $131.5 million, or 5.36% of assets. The Company's one year dynamic gap position at June 30, 2003 was a positive $168.8 million, or 7.44% of assets. At the quarter ended March 31, 2004, the dynamic gap was a negative $153.7 million or 6.26% of assets. The above table does not take into consideration the repricing dynamics in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized and whether the index is a current or lagging index. Included in the above numbers are the Company's estimates of prepayments of fixed-rate loans and mortgage-backed securities in a one-year pe riod and the Company's expectation that under current interest rates, certain advances of the FHLB will not be called. Changes between the periods were related to differing prepayment speeds expected, levels of loans held for sale and the shortening of recent liability funding.
During the quarter ended June 30, 2004, the Company prepaid $70 million of FHLB advances with a weighted average maturity of 14 months and weighted average rate of 4.65%. Also during the quarter the Company extended $50 million of its liability funding to the approximate range of thirty-six months to maturity date or initial call date.
A negative gap indicates that cumulative interest-sensitive liabilities exceed cumulative interest-sensitive assets and suggests that net interest income would decline if market interest rates increased. A positive gap would suggest the reverse. This relationship is not always ensured due to the repricing attributes of both interest-sensitive assets and interest-sensitive liabilities.
COMPARISON OF OPERATING RESULTS
QUARTERS ENDING JUNE 30, 2004 AND 2003The following table shows the variances in dollars and percentages between the Consolidated Statements of Income for First Financial for the quarters ended June 30, 2004 and 2003:
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CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
June 30, 2004 2003 (Amounts in thousands, except per share amounts) (Unaudited) Variance % change INTEREST INCOME Interest and fees on loans $ 27,386 $ 30,583 $ (3,197 ) (10.45 )% Interest on mortgage-backed securities 3,704 2,046 1,658 81.04 Interest and dividends on investments 436 344 92 26.74 Other 19 25 (6 ) (24.00 ) Total interest income 31,545 32,998 (1,453 ) (4.40 ) INTEREST EXPENSE Interest on deposits 5,344 6,595 (1,251 ) (18.97 ) Interest on borrowed money 7,048 6,836 212 3.10 Total interest expense 12,392 13,431 (1,039 ) (7.74 ) NET INTEREST INCOME 19,153 19,567 (414 ) (2.12 ) Provision for loan losses 1,125 1,450 (325 ) (22.41 ) Net interest income after provision for loan losses 18,028 18,117 (89 ) (0.49 ) OTHER INCOME Net gain on sale of loans 390 2,749 (2,359 ) (85.81 ) Net gain on sale of investment and mortgage-backed securities 659 523 136 26.00 Brokerage fees 635 432 203 46.99 Commissions on insurance 4,140 3,085 1,055 34.20 Other agency income 373 256 117 45.70 Service charges and fees on deposit accounts 2,931 2,680 251 9.37 Loan servicing operations, net 2,122 (1,303 ) 3,425 262.85 Real estate operations, net (197 )
(161 ) (36 ) 22.36 Other 1,273 1,019 254 24.93 Total other income 12,326 9,280 3,046 32.82 NON-INTEREST EXPENSE Salaries and employee benefits 11,302 10,770 532 4.94 Occupancy costs 1,261 1,314 (53 ) (4.03 ) Marketing 558 549 9 1.64 Depreciation, amortization, rental and maintenance of equipment 1,016 1,276 (260 ) (20.38 ) Prepayment penalty on FHLB advances 1,548 1,548 100.00 Other 4,117 3,389 728 21.48 Total non-interest expense 19,802 17,298 2,504 14.48 Income before income taxes 10,552 10,099 453 4.49 Income tax expense 3,850 3,614 236 6.53 NET INCOME $ 6,702 $ 6,485 $ 217 3.35 % NET INCOME PER COMMON SHARE BASIC $ 0.54 $ 0.51 $ 0.03 5.88 % NET INCOME PER COMMON SHARE DILUTED $ 0.52 $ 0.50 $ 0.02 4.00 %
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Net Interest Income
Net interest income of $19.2 million during the quarter ended June 30, 2004 declined slightly from net interest income of $19.6 million during the quarter ended June 30, 2003. The net interest margin for the quarter ended June 30, 2004 was 3.36% compared with 3.75% during the quarter ended June 30, 2003. Average earnings assets increased 9.4% to $2.3 billion during the quarter ended June 30, 2004 compared to $2.1 billion in the June 2003 quarter. As a result of these variances, net interest income declined 2.1%, or $414 thousand, between the two quarters. The gross interest margin decreased from 3.67% during the quarter ended June 30, 2003 to 3.32% during the quarter ended June 30, 2004. Partially offsetting the decline in the Company's net yield on earning assets, average earning assets increased by $195.6 million in the June 2004 quarter compared to the June 2003 quarter as a result of the purchase of lower yielding investments. The majority of the purch ases of lower yielding investments have been in the form of mortgage-backed securities.
Recent declines in interest rates have reduced the average cost of interest-bearing liabilities, leading to a decline of 44 basis points when comparing the two periods. The average yield on interest-earning assets decreased 79 basis points when comparing these same two periods. The Federal Reserve's Open Market Committee met in June 2004 and August 2004, raising the targeted Federal Funds rate by 1/4 of 1% each time. Based on a moderate pace of tightening by the Federal Reserve, the Company expects that its net interest margin will remain stable over the next several quarters.
The following table summarizes rates, yields and average interest earning asset and interest-bearing liability balances for the respective quarters (amounts in thousands):
Three Months Ended June 30, 2004 2003 Average Average Average Average Balance Yield/Rate Balance Yield/Rate Loans $ 1,829,786 5.98 % $ 1,834,732 6.67 % Mortgage-backed securities 379,573 3.90 206,035 3.97 Investments and other interest-earning assets 72,885 2.46 45,878 3.23 Total interest-earning assets $ 2,282,244 5.53 % $ 2,086,645 6.32 % Deposits $ 1,482,149 1.45 % $ 1,456,512 1.82 % Borrowings 766,126 3.68 574,086 4.78 Total interest-bearing liabilities $ 2,248,275 2.21 % $ 2,030,598 2.65 % Gross interest margin 3.32 % 3.67 % Net interest margin 3.36 % 3.75 %
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The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (in thousands):
Three Months Ended June 30, 2004 versus 2003 Volume Rate Total Interest income: Loans $ (82 ) $ (3,115 ) $ (3,197 ) Mortgage-backed securities 1,694 (36 ) 1,658 Investments and other interest-earning assets 194 (108 ) 86 Total interest income 1,806 (3,259 ) (1,453 ) Interest expense: Deposits 114 (1,365 ) (1,251 ) Borrowings 1,963 (1,751 ) 212 Total interest expense 2,077 (3,116 ) (1,039 ) Net interest income $ (271 ) $ (143 ) $ (414 ) With market interest rates at the lowest levels in many years, further declines would likely be expected to adversely affect the Company's net interest margin. However, as the economy expands, it is anticipated that short-term rates will move upward. In the current quarter the Federal Reserve has raised short-term rates by 25 basis points. In an increasing rate environment, the Company expects that adjustable-rate loans will gradually reprice higher in reaction to increasing values of market indices to which they are tied. In a rising rate environment, loans may adjust less rapidly than the Company's funding sources, which could adversely affect the Company's net interest margin. The Company's issuance of long-term debt associated with trust preferred securities has also reduced the Company's net interest margin during the current quarter.
Compared to the preceding quarter in each case the net interest margin for the quarters ended December 31, 2003, March 31, 2004 and June 30, 2004 declined by 30, 3 and 5 basis points, respectively. The Company estimates that the issuance of long-term debt associated with trust preferred securities resulted in decrease of approximately nine basis points in the net interest margin for the June 2004 quarter. Management also expects continued pressure on its net interest margin as a result of the amortization and maturities of loans and investments and mortgage-backed securities and the need to reinvest those funds at current market interest rates.
Provision for Loan Losses
The provision for loan losses is recorded in amounts sufficient to bring the allowance for loan losses to a level deemed appropriate by management. Management determines this amount based on many factors, including its assessment of loan portfolio quality, loan growth, changes in loan portfolio composition, net loan charge-off levels, and expected economic conditions. The lower provision for loan losses in the June 2004 quarter was attributable to lower charge-offs and lower problem asset levels. Net loan charge-offs totaled $1.1 million and $1.8 million for the quarters ended June 30, 2004 and 2003, respectively. Problem assets were $13.0 million at June 30, 2004 compared to $14.4 at June 30, 2003. Total loan loss reserves as of June 30, 2004 were $14.8 million, or .82% of the total net loan portfolio compared with $15.1 million, or .84% of the total net loan portfolio at June 30, 2003.
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Other Income/Non-Interest Expenses
Total other income increased 32.8% during the quarter ended June 30, 2004 compared with the quarter ended June 30, 2003. Loan servicing operations, net increased $3.4 million, reflective of higher valuations of servicing rights during the current period. As a result of higher long-term interest rates and slowing prepayment speeds, the valuation of the Company's originated mortgage servicing asset improved during the current quarter ended June 30, 2004, resulting in a $1.7 million recovery of impairment charges previously incurred. One year ago, as market interest rates declined, the Company incurred an impairment charge of $1.4 million related to its originated servicing asset. However, as a result of higher interest rates and less refinance activity, mortgage loans originated for sale dramatically declined during the quarter ended June 30, 2004 and associated gains from loan sales also declined by $2.4 million. After excluding gains from loan sales and loan servicing operati ons, net recognized during the respective quarters June 30, 2004 and 2003, all other sources of other income improved by $2.0 million, or 25.3%, during the current quarter. The purchase of Kimbrell Insurance Group contributed materially to higher total revenues from insurance agency operations, which increased 35.1%. Fees on deposit accounts also grew by 9.4%, attributable to strong growth in the number of retail and business checking accounts.
Total non-interest expenses increased by 14.5%, or $2.5 million, during the quarter ended June 30, 2004 compared with the quarter ended June 30, 2003. The Company incurred penalties of $1.5 million during the quarter ended June 30, 2004 to prepay $70 million of Federal Home loan bank advances. Also included in non-interest expense was a $41 thousand impairment loss of customer list intangible that was acquired through the acquisition of an insurance agency. Expense growth from one year ago was partially attributable to the acquisition of the Kimbrell Insurance Group, normal annual merit increases and staffing for the January 2004 opening of the Company's 46th branch. After deducting penalties for prepayment of FHLB advances and additional other expenses from the Kimbrell Insurance Group acquisition total non-interest expense for the June 2004 quarter increased by $643 thousand, or 3.7%, from levels in the June 2003 comparable quarter. Total non-interest expense for the June 30, 2004 quarter was slightly lower than expenses incurred in the quarter ended March 31, 2004.
Income Tax Expense
The Company's effective tax rate for the third quarter of fiscal 2004 and 2003 approximated 36.5% and 35.8%, respectively.
COMPARISON OF OPERATING RESULTS
NINE MONTHS ENDING JUNE 30, 2004 AND 2003The following table shows the variances in dollars and percentages between the Consolidated Statements of Income for First Financial for the nine months ended June 30, 2004 and 2003:
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CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended June 30, 2004 2003 (Amounts in thousands, except per share amounts) (Unaudited) Variance % change INTEREST INCOME Interest and fees on loans $ 83,337 $ 96,110 $ (12,773 ) (13.29 )% Interest on mortgage-backed securities 10,676 5,375 5,301 98.62 Interest and dividends on investments 1,276 1,167 109 9.34 Other 53 98 (45 ) (45.92 )
Total interest income 95,342 102,750 (7,408 ) (7.21 )
INTEREST EXPENSE Interest on deposits 16,609 21,811 (5,202 ) (23.85 ) Interest on borrowed money 20,832 21,297 (465 ) (2.18 ) Total interest expense 37,441 43,108 (5,667 ) (13.15 )
NET INTEREST INCOME 57,901 59,642 (1,741 ) (2.92 ) Provision for loan losses 4,375 4,585 (210 ) (4.58 ) Net interest income after provision for loan losses 53,526 55,057 (1,531 ) (2.78 ) OTHER INCOME Net gain on sale of loans 1,344 7,311 (5,967 ) (81.62 ) Net gain on sale of investment and mortgage-backed securities 2,053 1,709 344 20.13 Brokerage fees 1,779 1,456 323 22.18 Commissions on insurance 12,007 9,354 2,653 28.36 Other agency income 1,065 765 300 39.22 Service charges and fees on deposit accounts 8,521 7,863 658 8.37 Loan servicing operations, net 1,387 (2,299 ) 3,686 160.33 Real estate operations, net (656 )
(519 ) (137 ) 26.40 Other 3,716 3,333 383 11.49 Total other income 31,216 28,973 2,243 7.74 NON-INTEREST EXPENSE Salaries and employee benefits 33,841 32,764 1,077 3.29 Occupancy costs 3,900 3,901 (1 ) (0.03 ) Marketing 1,299 1,349 (50 ) (3.71 ) Depreciation, amortization, rental and maintenance of equipment 3,779 3,981 (202 ) (5.07 ) Prepayment penalty on FHLB advances 1,548 1,548 100.00 Other 11,745 10,306 1,439 13.96 Total non-interest expense 56,112 52,301 3,811 7.29 Income before income taxes 28,630 31,729 (3,099 ) (9.77 ) Income tax expense 10,284 11,367 (1,083 ) (9.53 ) NET INCOME $ 18,346 $ 20,362 $ (2,016 ) (9.90 )% NET INCOME PER COMMON SHARE BASIC $ 1.46 $ 1.58 $ (0.12 ) (7.59 )% NET INCOME PER COMMON SHARE DILUTED $ 1.42 $ 1.54 $ (0.12 ) (7.79 )% 33
Net Interest Income
With current market interest rates at extremely low levels, prepayment speeds have accelerated on loans and mortgage-backed securities. Earning assets have declined and reinvestment of these cash flows has been in lower yielding assets. The gross interest margin decreased from 3.71% during the nine months ended June 30, 2003 to 3.35% during the nine months ended June 30, 2004. The net yield on earning assets decreased to 3.40% from 3.80% in the prior nine months. The rate of decline in the Company's average cost of funds has slowed relative to the decline in average yield on earning assets. The Company also continues to have an active common stock repurchase program, which has reduced average earning assets. Partially offsetting the decline in the Company's net yield on earning assets, average earning assets increased by $177.9 million in the nine months ended June 2004 compared to the prior nine months. The majority of the increase in average earning assets has been in the purchase of lower yielding investments in the form of mortgage-backed securities as loan originations continue at a slower pace.
Recent declines in interest rates have reduced the average cost of interest-bearing liabilities, leading to a decline of 59 basis points when comparing the two periods. The average yield on interest-earning assets decreased 95 basis points when comparing these same two periods.
The following table summarizes rates, yields and average earning asset and interest-bearing liability balances for the respective quarters (amounts in thousands):
Nine Months Ended June 30,
2004
2003 Average Average Average Average Balance Yield/Rate Balance Yield/Rate Loans $ 1,821,754 6.10 % $ 1,874,672 6.84 % Mortgage-backed securities 380,978 3.74 167,751 4.27 Investments and other interest-earning assets 67,282 2.61 49,736 3.40 Total interest-earning assets $ 2,270,014 5.60 % $ 2,092,159 6.55 % Deposits $ 1,468,666 1.51 % $ 1,447,092 2.01 % Borrowings 757,241 3.67 581,290 4.90 Total interest-bearing liabilities $ 2,225,907 2.25 % $ 2,028,382 2.84 % Gross interest margin 3.35 % 3.71 % Net interest margin 3.40 % 3.80 % The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (in thousands):
Nine Months Ended June 30, 2004 versus 2003 Volume Rate Total Interest income: Loans $ (2,649 ) $ (10,124 ) $ (12,773 ) Mortgage-backed securities 6,051 (750 ) 5,301 Investments and other interest-earning assets 441 (377 ) 64 Total interest income 3,843 (11,251 ) (7,408 ) Interest expense: Deposits 320 (5,522 ) (5,202 ) Borrowings 5,582 (6,047 ) (465 ) Total interest expense 5,902 (11,569 ) (5,667 ) Net interest income $ (2,059 ) $ 318 $ (1,741 ) 34
Provision for Loan Losses
The provision for loan losses was $4.4 million in the first nine months of 2004 compared with $4.6 million in the first nine months of fiscal 2003. The slightly lower provision for loan losses was principally attributable to lower problem loans and lower net charge-offs. Net charge-offs for the nine months ended June 30, 2004 and 2003 were $4.6 and $5.3, respectively.
Other Income/Non-Interest Expenses
The $6.0 million decrease in gains on sales of loans for the nine months ended June 30, 2004 is directly attributable to the decreased originations of fixed-rate agency qualifying mortgages and the decrease in mortgage refinances resulting from mortgage loan interest rates stabilizing and slightly increasing from the levels reached during the first nine months of fiscal 2003. Commissions on insurance and other agency income increased $3.0 million, or 29.2%, for the nine months ended June 30, 2004 compared to the same period ended June 30, 2003 principally as a result of the acquisition of the Kimbrell Insurance Group in January 2004. As a direct result of higher interest rates at June 30, 2004 as compared with nine months ago and estimates of slower future prepayment speeds, valuations of the Company's originated mortgage servicing asset increased at quarter-end, resulting in a $241 thousand recovery of impairment charges previously incurred. During the nine months ended June 30, 2003 impairment allowances were increased by $2.9 million. The changes to valuation allowances and lower amortization of $581 thousand contributed materially to the increase in loan servicing fees of $3.7 million between the two nine month periods.
Total non-interest expenses increased by 7.3%, or $3.8 million, during the nine months ended June 30, 2004 compared with the comparable nine months ended June 30, 2003. During the quarter ended June 30, 2004 the Company incurred penalties of $1.5 million to prepay $70 million of Federal Home Loan Bank advances. Expense growth from one year ago was partially attributable to the acquisition of the Kimbrell Insurance Group, normal annual merit increases and staffing for the January 2004 opening of the Company's 46th branch. Also included in non-interest expense was a $41 thousand impairment loss of customer list intangible that was acquired through the acquisition of an insurance agency. After deducting penalties for prepayment of FHLB advances and additional other expenses related to the Kimbrell Insurance Group acquisition, total non-interest expense for the nine months ended June 30, 2004 increased by $2.0 million, or 3.7%, from levels in the June 2003 compara ble nine month period.
The Company has continued its efforts to become more efficient in its operations and as a result, full-time equivalent employees were approximately 746 at June 30, 2004 as compared to 767 at September 30, 2003. The 746 employees at June 30, 2004 exclude approximately 38 full-time equivalent employees of the Kimbrell Insurance Group that was purchased in January 2004. The Company has reduced the number of loan processing service units and personnel as a result of slower residential mortgage originations.
Income Tax Expense
During the first nine months of fiscal 2004 and 2003 the Company's effective tax rate approximated 35.9% and 35.8%, respectively.
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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Variable Interest Entities
Effective July 1, 2003, the Company adopted FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which was revised in December 2003, which addresses consolidation by business enterprises of variable interest entities. Under FIN 46, an enterprise that holds significant variable interest in a variable interest entity but is not the primary beneficiary is required to disclose the nature, purpose, size, and activities of the variable interest entity, its exposure to loss as a result of the variable interest holder's involvement with the entity, and the nature of its involvement with the entity and date when the involvement began. The primary beneficiary of a variable interest entity is required to disclose the nature, purpose, size, and activities of the variable interest entity, the carrying amount and classification of consolidated assets that are collateral for the variable interest entity's obligations, and any lack of recourse by creditors ( or beneficial interest holders) of a consolidated variable interest entity to the general credit of the primary beneficiary.
In accordance with FIN 46R, the Company did not include the trust subsidiary, First Financial Capital Trust I, in its consolidated financial statements at June 30, 2004. The trust subsidiary was formed to raise capital by issuing preferred securities to institutional investors. The Company owns 100% of the junior subordinated debt of the capital trust. This transaction increased the Company's long-term debt by $46.4 million, decreased debt outstanding on a line of credit with another bank by $24.1 million and increased cash by $22.3 million. Cost associated with the debt amounted to $1.4 million, which are included in other assets. The full and unconditional guarantee by the Company for the preferred securities remains in effect.
In accordance with FIN 46R, the Company, as primary beneficiary, included the subsidiary, Port City Ventures LLC, in its consolidated financial statements at June 30, 2004. The LLC was formed to take advantage of tax credits available through The State Housing Authority. Port City Ventures LLC is a 99.99% limited partner in North Central Apartments and will invest in tax credits. The consolidation of the subsidiary increased other assets approximately $50 thousand.
In accordance with FIN 46R, the Company, as primary beneficiary, included the variable interest entity, FFSL I LLC, in its consolidated financial statements at June 30, 2004. The LLC was formed to purchase the Company's corporate operations center. The consolidation of the subsidiary increased fixed assets approximately $16.2 million.
Application of Accounting Principles to Loan Commitments
In March 2004, Staff Accounting Bulletin ("SAB 105"), Application of Accounting Principles to Loan Commitments, was issued to provide guidance on recording a mortgage loan commitment on the balance sheet at fair value. SAB 105 provides specific guidance on the inputs to a valuation-recognition model to measure commitments accounted for at fair value. Current accounting guidance requires the loan commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding an expected future cash flows related to the customer relationship or loan servicing. The reporting entity should determine the fair value of the loan commitment based solely on the relationship to market interest rates, absent any expected cash flows from the customer relationship or servicing rights.
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The adoption of SAB 105 was required for new commitments for loans held for sale entered into on or after April 1, 2004. The Company previously recognized a servicing value at the time the commitment was made. By delaying recognition of the servicing value until the loan is sold, the Company recognized approximately $270 thousand less in gains on loan sales than if calculated prior to the adoption of SAB 105.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Prescription-Drug Subsidy
On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. The Financial Accounting Standards Board (FASB) issued a Staff Position, FAS 106-2, on May 9, 2004 which is effective for the first interim or annual reporting period beginning after June 15, 2004. Measures of the Company's accumulated postretirement benefit obligation or net periodic retirement benefit cost do not reflect any amount associated with the subsidy because the Company has not been able to conclude whether the benefits provided by plan are actuarially equivalent to Medicare Part D under the Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.
The Corporation's market risk arises primarily from interest rate risk inherent in its lending, deposit-taking and other funding activities. The structure of the Corporation's loan, investment, deposit and borrowing portfolios is such that a significant increase in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Committee ("ALCO"), which is comprised of senior management. ALCO regularly reviews the Corporation's interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines.
As of June 30, 2004, Management believes that there have been no significant changes in market risk measures related to OTS Thrift Bulletin 13A as disclosed in the Corporation's Annual Report on Form 10-K for the year ended September 30, 2003.
In addition to regulatory calculations, the Company performs additional analyses assuming that interest rates increase or decrease by specified amounts in equal increments over the next four quarters. Combined with internal assumptions of new business activity and assumptions of changes in product pricing relative to rate changes, these analyses indicate that from a base rate scenario assuming no change in rates a gradual increase of 100 basis points over the next twelve months would decrease net interest income by 2.0%. Should rates gradually decline over the next twelve months by 100 basis points from the base rate scenario, net interest income would increase by 1.1% over that period.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of the Company's management, including chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures as of June 30, 2004. Based on that evaluation, the Company's management, including the CEO and CFO, has concluded that the Company's disclosure controls and procedures are effective. During the third quarter of fiscal 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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FIRST FINANCIAL HOLDINGS, INC.
PART II - OTHER INFORMATIONThe Company is subject to various legal proceedings and claims arising in the ordinary course of its business. Any litigation is vigorously defended by the Company, and, in the opinion of management based on consultation with external legal counsel, any outcome of such litigation would not materially affect the Company's consolidated financial position or results of operations.
On September 3, 1998, Peoples Federal filed a declaratory judgment action in Georgetown County, which named certain mortgage debtor defendants from a prior foreclosure and others, seeking a judicial determination of claims made by the former mortgage debtors against Peoples Federal as purchaser of the property foreclosed. A final order was issued October 29, 2001. The ruling resulted in a net money judgment in Peoples Federal's favor for conspiracy to devalue the foreclosed property. There were other rulings pertaining to such issues as declaration of developers' rights, future assessments, restrictive covenants and density designation, which were varied. Both sides appealed. Peoples Federal was consolidated into First Federal on August 30, 2002.
On April 26, 2004, the South Carolina Supreme Court published their opinion finding in favor of Peoples Federal. The Court upheld the conspiracy finding, upheld the punitive damages ($600,000) awarded to Peoples Federal for the conspiracy, reversed an award of assessments and attorney's fees against Peoples Federal, and ruled Peoples Federal has developer's rights on the foreclosed property under the restrictive covenants as amended. The Court remanded the case for re-determination of the actual damages awarded to Peoples Federal for the conspiracy, due to an apparent double recovery. Peoples Federal was also awarded costs on the appeal as prevailing party.
A petition for rehearing of the appeal filed by the former mortgage debtors and others was denied May 26,2004. Motions were filed on the remand and on August 11, 2004 an order was entered setting the actual damage award to Peoples Federal at $454,959, plus the $600,000 punitive damages previously awarded and affirmed on appeal. This judgment will be subject to motion for reconsideration until on or about August 23, 2004. This judgment will be subject to appeal until on or about September 13, 2004 unless a motion for reconsideration is made, in which case there will be 30 days to appeal after an Order on reconsideration is received. It is expected a motion for consideration and/or appeal will be filed by the former mortgage debtors and others.
The debtors have also filed a motion to refer the case back to the same Special Referee for post-judgment relief to which they now claim they are entitled in the form of further declaratory judgments limiting development rights and monetary awards for fees, costs and developer's assessments against Peoples Federal. The total claim is approximately $850,000. The motion to refer for post-judgment relief has been taken under advisement by the Circuit Court and some determination is expected by early September 2004.
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Item 2 -- Changes in Securities, Use of Proceeds and Issuer and Issuer Purchases of Equity Securities
The following table summarizes the total number of shares repurchased by the Company as part of a publicly announced plan or as part of exercising outstanding stock options:
For the Three Months Ended June 30, 2004 Total Number Maximum Number of Shares of Shares that Total Number Average Purchased as May Yet Be of Shares Price paid Part of Publicly Purchased Under Purchased Per Share Announced Plan the Announced Plan 4/1/2004 thru 4/30/2004 12,000 $ 29.17 12,000 417,700 5/1/2004 thru 5/31/2004 100,704 29.04 97,300 320,400 6/1/2004 thru 6/30/2004 115,842 29.62 115,600 204,800 228,546 29.34 224,900
For the Nine Months Ended June 30, 2004 Total Number Maximum Number of Shares of Shares that Total Number Average Purchased as May Yet Be of Shares Price paid Part of Publicly Purchased Under Purchased Per Share Announced Plan the Announced Plan 10/1/2003 thru 10/31/2003 1,785 $ 31.42 506,700 11/01/2003 thru 11/30/2003 16,284 30.26 10,000 496,700 12/01/2003 thru 12/31/2003 2,266 32.33 496,700 1/1/2004 thru 1/31/2004 31,130 29.79 31,000 465,700 2/1/2004 thru 2/29/2004 35,484 29.47 32,000 433,700 3/1/2004 thru 3/31/2004 5,644 29.68 4,000 429,700 4/1/2004 thru 4/30/2004 12,000 29.17 12,000 417,700 5/1/2004 thru 5/31/2004 100,704 29.04 97,300 320,400 6/1/2004 thru 6/30/2004 115,842 29.62 115,600 204,800 321,139 29.49 301,900 On May 27, 2003, the Company announced that the Board of Directors had authorized a stock repurchase program to acquire up to 650,000 shares of the Company's common stock. On April 20, 2004, the Company announced that the Board of Directors extended the expiration date from March 31, 2004 until November 30, 2004. The Company has purchased 445,200 shares under the current repurchase program.
In addition to the repurchase program described above, the Company's employee and outside directors stock options plans contain provisions allowing the repurchase of shares as part or the full payment for exercising outstanding options. For the three months ended June 30, 2004, 3,646 shares were repurchased under these provisions.
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Item 6 - Exhibits and Report on Form 8-K.
Exhibit No.
Description of Exhibit
Location
3.1
Certificate of Incorporation, as amended, of Registrant
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
3.2
Bylaws, as amended, of Registrant
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
3.4
Amendment to Registrant's Certificate of Incorporation
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
3.7
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2001.
3.8
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003
4
The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries
N/A
10.3
Employment Agreement with A. Thomas Hood, as amended
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
10.4
Employment Agreement with Charles F. Baarcke, Jr.
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
10.5
Employment Agreement with John L. Ott, Jr.
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
10.6
1990 Stock Option and Incentive Plan
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-57855.
10.9
1996 Performance Equity Plan for Non-Employee Directors
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 22, 1997.
10.10
Employment Agreement with Susan E. Baham
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
10.11
1997 Stock Option and Incentive Plan
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders held on January 28, 1998.
10.16
2001 Stock Option Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 31, 2001.
10.17
2004 Outside Directors Stock Options-for-Fees Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 29, 2004
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Exhibit No. Description of Exhibit
Location
10.18
2004 Employee Stock Purchase Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 29, 2004
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Filed herewith
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
Filed herewith
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer
Filed herewith
Reports on Form 8-K
On July 20, 2004, the Company furnished a report on Form 8-K under item12 announcing the earnings release dated July 20, 2004, which included selected financial data for the quarter ended June 30, 2004 and for other selected periods.
On July 23, 2004, the Company furnished a report on Form 8-K under item 9 announcing the declaration of a regular quarterly dividend payable to record holders as of August 6, 2004.
On August 3, 2004, the Company furnished a report on Form 8-K under Item 9 referencing the Company's presentation on August 3, 2004 to the FIG Investors Symposium.
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FIRST FINANCIAL HOLDINGS, INC.
SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Financial Holdings, Inc.
Date: August 13, 2004
By:
/s/ Susan E. Baham
Susan E. Baham
Executive Vice President
Chief Financial Officer and
Principal Accounting Officer 43